After breaking out to new 2023 highs, US equity futures are up small (on "debt talk progress" even though there has been zero actual debt talk progress) ahead of Powell’s speech today, trading in a narrow 10 points. As of 730am ET, S&P futures are up 0.2% to 4,220 while Nasdaq futures are up 0.1%. European stocks are up 0.8%m near session highs with Germany’s DAX set for a record close for the first time since January 2022 while the Nikkei 225 closed at a 33-year peak, as momentum carried over from Wall Street.  Bond yields reversed earlier losses and hit session highs around 3.65% while dollars are weaker. Pre-market, megacap tech, where we just saw the biggest call buying since 2014, continues to drive higher amid yesterday’s rally. Commodities are mixed: oil is set to close its best week since mid-April while base metals are lagging. Macro calendar is quiet today with the major focus on Powell’s speech at a panel at 11am ET (Fed) where former chair Ben Bernanke will also be present. Keep an eye on the key 4200 level today.

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In premarket trading, Applied Materials shares edged lower, down 1.7% trading, after the semiconductor-capital equipment company said sales will drop in the third quarter as the memory- chip slump weighs on its business. However, analysts noted that strength in its IoT, Communications, Automotive, Power and Sensors (ICAPS) business might offset some of the weakness in the memory segment. Here are some other notable premarket movers:

• PacWest shares rose 3.8% in premarket trading Friday, set for a third day of gains amid an ongoing relief rally for US regional banks. PacWest has already gained 28% this week, and is set for the best weekly gain since June 2020.
• Farfetch shares surge as much as 21% in premarket trading, poised for their biggest jump since November, after the specialty online retailer’s first-quarter results beat expectations on back of growing sales volumes in the US and China. Analysts expect further improvement in 2H, as business in China ramps up and FX headwinds ease.

As discussed extensively in recent days, much of the recent optimism appears to be some unfounded hope that a debt ceiling deal will get done ahead of a market freakout just because algos believe the jawboning from politicians. In a call early Friday from Japan, President Joe Biden told his negotiating team that he’s confident Congress will act in time to avoid a default (he won't), according to a White House official. House Speaker Kevin McCarthy and Senate Majority Leader Chuck Schumer are making plans for votes in the coming days on a bipartisan deal (there won't be a deal).

"Growing optimism for a resolution to the debt ceiling negotiations has lifted sentiment, although the mood was slightly tempered by question marks over the Federal Reserve’s next move on interest rates,” said Richard Hunter, head of markets at Interactive Investor.

Meanwhile, treasuries recouped some losses from a selloff on mounting doubts the Federal Reserve will pause its credit tightening campaign next month.

European stocks rally for a second day with the German DAX on course for a record close as the mood around the US debt ceiling negotiations continues to improve. The Stoxx 600 is up 0.8%, its largest gain in two weeks, with financial services, miners and tech the strongest-performing sectors. Here are some of the most notable European movers:

• Allegro gain as much as 5.7% after Poland’s largest e-commerce platform said it would increase merchants’ co-financing of delivery costs and introduce commissions on pay buy-now-pay- later
• Smiths Group rises as much as 1.9% after an earnings update from the UK engineer. Jefferies (buy) says the top-line guidance upgrade will likely be well-received by investors
• 1&1 shares jump as Deutsche Bank raises the German telecom operator to buy from hold, seeing room for the stock to go higher whether or not it opts to abandon its 5G network buildout
• SBB shares fall as much as 7.7% to the lowest in more than five years, after Goldman Sachs halved its price target on the beleaguered Swedish landlord and reiterated its sell recommendation
• Novartis shares fall as much as 2% after JPMorgan opened a negative catalyst watch on the Swiss pharma group ahead of the company’s presentation of data from its NATALEE breast cancer trial
• Burberry shares fall as much as 3.2%, extending Thursday’s 5.2% drop that followed the publication of the British luxury- goods company’s FY results. Berenberg says the guidance was “not enough”
• C&C slumps as much as 18% after the cider maker issued a profit warning, citing “significant challenges” in relation to implementing a complex system upgrade in two of its UK businesses
• CEZ falls as much as 5.8% after the Czech government took legislative steps that would allow the it to overhaul the power utility without minority investors’ consent

Earlier in the session, Asian stocks were mostly higher following the tech-led gains on Wall Street, although Chinese markets lagged and were the outlier to Friday’s risk-on mood amid disappointment from Alibaba’s revenue miss. The Hang Seng Tech Index slumped as much as 2.4% as Alibaba Group Holding Ltd dropped in the wake of disappointing sales.  India stocks snapped a three-day losing streak as banks and Adani Group stocks surged late in the session.  The S&P BSE Sensex rose 0.5% to 61,729.68 in Mumbai, while the NSE Nifty 50 Index advanced 0.4% to 18,203.40. The MSCI Asia-Pacific index climbed 0.3% for the day. Adani Group stocks rallied led by flagship Adani Enterprises’ 3.5% surge after a Supreme Court-appointed panel in a report said it found no conclusive evidence to suggest a stock price manipulation in the group’s stocks. Infosys contributed the most to the Sensex’s gain, increasing 1.8%. Out of 30 shares in the Sensex index, 22 rose and 8 fell.

In FX, the Bloomberg Dollar Spot Index is down 0.2% having lost ground versus all its G-10 rivals. The New Zealand dollar is the best performer followed by the Norwegian krone.

In rates, treasuries initially rose for the first time this week with the US 10-year yield dropping 2bps to 3.62% before the entire move reversed and yields resumed their grind higher; the 10Y was last trading at 3.66% with bunds and gilts are little changed.

In commodities, crude futures advance with WTI rising 0.8% to trade near $72.40. Spot gold adds 0.4% to $1,965. Bitcoin gains 0.5%

Bitcoin is modestly firmer and despite eclipsing the USD 27k mark as the USD comes under Yuan-driven pressure this morning, BTC thus far has been unable to hold onto the level and is now holding just below it.

To the day ahead now, and the highlights will include remarks from Fed Chair Powell and ECB President Lagarde. Other central bank speakers include the Fed’s Williams and Bowman, the ECB’s Schnabel and De Cos, along with the BoE’s Haskel. Data releases include German PPI for April. Finally, G7 leaders are currently meeting in Japan.

Market Snapshot

• S&P 500 futures up 0.2% to 4,219.50
• MXAP up 0.3% to 162.24
• MXAPJ up 0.2% to 513.46
• Nikkei up 0.8% to 30,808.35
• Topix up 0.2% to 2,161.69
• Hang Seng Index down 1.4% to 19,450.57
• Shanghai Composite down 0.4% to 3,283.54
• Sensex up 0.2% to 61,577.36
• Australia S&P/ASX 200 up 0.6% to 7,279.52
• Kospi up 0.9% to 2,537.79
• STOXX Europe 600 up 0.6% to 468.70
• German 10Y yield little changed at 2.45%
• Euro up 0.2% to $1.0788
• Brent Futures up 0.6% to $76.31/bbl
• Gold spot up 0.5% to $1,967.13
• U.S. Dollar Index down 0.23% to 103.35

Top Overnight News

• Europe’s largest asset manager, Amundi, is shifting assets to China from the US as it feels the former market has become too cheap to ignore and has superior economic prospects. FT
• China’s crackdown on overseas firms has made clear that leader Xi Jinping values security over economic growth. To eradicate any doubt, according to people familiar with the matter, he has put state-security czar Chen Yixin in charge. The campaign, which has included raids on Chinese offices of U.S. due-diligence firms and questioning of staff at the Bain consulting firm, is sending shock waves across global businesses. WSJ
• BOJ Governor Kazuo Ueda said on Friday the central bank will patiently maintain its ultra-loose monetary policy given "very high" uncertainty over the economic outlook. RTRS
• The European Central Bank is stepping up scrutiny of lenders’ liquidity reserves and may communicate stricter requirements to individual firms later this year, according to people with knowledge of the matter. BBG
• G7 countries are preparing new sanctions against Russia, covering ships, aircraft, individuals and diamonds, officials say, as they seek to increase economic pressure on the Kremlin’s war machine. FT
• Germany’s PPI cools by more than anticipated in April, coming in at +4.1% Y/Y (down from +6.7% in Mar and below the Street’s +4.3% forecast). RTRS
• House Speaker Kevin McCarthy and Senate Majority Leader Chuck Schumer are making plans for votes in the coming days on a bipartisan deal to avert a catastrophic US debt default. McCarthy said that negotiators on the federal debt limit may reach an agreement in principle as soon as this weekend, lining up a vote in his chamber. BBG
• The White House is willing to make concessions on work requirements for certain federal aid programs, a breakthrough that could lead to an imminent debt ceiling deal. Politico
• "Skip" is the new "pause." Jerome Powell may shine some light on the murky rate path as the FOMC looks increasingly split on whether to pause next month or keep on hiking. A compromise would be a skip, where they put off an increase in June but return to it in July. Powell takes part in a panel discussion at a Fed conference today and there'll be a Q&A. John Williams also speaks there. BBG

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly higher following the tech-led gains on Wall St where the Nasdaq outperformed and the S&P 500 printed a 9-month high on debt ceiling optimism and firm data, although Chinese markets lagged amid disappointment from Alibaba’s revenue miss. ASX 200 was lifted with the tech sector front-running the gains as it took inspiration from its US counterpart and with the top-weighted financial industry trailing closely behind. Nikkei 225 surged at the open to print its highest since August 1990 although pared some of the gains after losing steam on its approach to the 31,000 level and as participants digested the latest CPI figures which were mostly in line with expectations but showed a faster pace of acceleration. Hang Seng and Shanghai Comp. were mixed with the Hong Kong benchmark pressured as tech giants suffered following Alibaba’s earnings which beat on the bottom line but missed on revenue, while frictions lingered after the US and Taiwan reached an initial agreement on a '21st Century' trade pact and with China concerned about recent signs of negative China-related developments at the G7.

Top Asian News

• Chinese President Xi said China proposed to establish meeting and dialogue mechanisms in cooperation between China and Central Asian countries in which the mechanisms will cover agriculture, transportation, emergency management, education and political party affairs, while Xi added that China will roll out more trade facilitation measures and upgrade bilateral investment agreements with Central Asian countries.
• China's Commerce Minister is to meet with US Commerce Secretary Raimondo and US Trade Representative Tai next week, according to Politico.
• China's Taiwan Affairs Office said it will allow travel agencies to resume group tours for Taiwan residents to the mainland from today, according to Reuters.
• USTR office said US and Taiwan reached an initial agreement on a '21st Century' trade pact which covers customs and trade facilitation, good regulatory practices, services regulations, anti-corruption measures and SMEs. USTR added that further US-Taiwan negotiations will commence on additional trade areas including agriculture, digital trade, labour, environment and SOEs, according to Reuters.
• China’s Major state-owned banks are reportedly seen swapping Yuan for Dollars in the onshore FX forwards market, according to currency traders cited by Reuters; One source said state banks have started heavily trading buy/sell 1yr tenor since Thursday. Subsequently, China is to curb speculations on Yuan rates when necessary, according to PBoC.
• BoJ's Ueda says the domestic economy is picking up, driver of the economic recovery is likely to shift from pent up demand to rising income/expenditure. Adds, it is appropriate to take time to decide on adjustments to monetary easing toward a future exit. "While there is an opposite risk that inflation will remain above 2 percent if a change in policy falls behind the curve, the cost of waiting for underlying inflation to rise until it can be judged that 2 percent inflation has fully taken hold is not as large as the cost of making hasty policy changes. In this sense, it is appropriate to take time to decide on adjustments to monetary easing toward a future exit."

European bourses are in the green, Euro Stoxx 50 +0.8%, and are set to see the week out with upside of a similar magnitude. Thus far, fresh macro drivers have been limited the focus firmly on the Central Bank docket which features Lagarde & Schnabel from the ECB. Stateside, futures are flat/slightly firmer following as the debt ceiling sees tentative progress and participants switch their near-term focus to Fed speak/next week's data; firstly, Fed's Powell, Williams & Bowman are due today. Deere & Co (DE) Q1 2023 (USD): EPS 9.65 (exp. 8.59), Revenue 17.39bln (exp. 14.83bln). +2.5% in pre-market trade. Samsung Electronics (005930 KS) will not be swapping out default search engine on its smartphones from Google (GOOGL) to Microsoft's (MSFT) Bing, via WSJ citing sources.

Top European News

• UK plans GBP 1bln of semiconductor investment in a new strategy that aims to strengthen the domestic industry and chip supply chains, according to the government.
• ECB is reportedly to increase scrutiny of bank liquidity and could lift requirements, via Bloomberg; could communicate such requirements later this year. Scrutiny into liquidity following on from US bank and Credit Suisse (CSGN SW) failures.
• ECB's Lagarde says we are heading towards more delicate policy decisions going forward; will be courageous to take the decisions needed to bring inflation back to the target.

Geopolitics

• Ukrainian President Zelensky is to travel to Japan to attend the G7 Summit in person, according to Bloomberg.
• US senior administration official said all G7 members are preparing to implement new Russian sanctions and export controls with the sanctions aimed at closing evasion loopholes and will target war inputs, energy reliance and access to financial systems. US is to target Russia with roughly 300 sanctions on individuals, entities, vessels and aircraft across Europe, the Middle East, and Asia. US sanctions will also target financial facilitators, Russia's future energy and extraction capabilities, as well as others supporting Russia's war, while G7 countries remain committed to upholding the price cap on Russian oil, according to Reuters.
• US President Biden's administration signalled to European allies in recent weeks that the US would allow them to export F-16 fighter jets to Ukraine, while Ukraine was said to have used a Patriot to shoot down at least one Russian fighter jet in recent weeks, according to CNN's Bertrand.
• EU''s President of the European Council Michel said they will restrict the sale of Russian diamonds and call on China to pressure Russia to stop military aggression, while he said stable and constructive cooperation with China is in their interests and that they need to engage with China on global challenges.

Commodities

• Crude is firmer on the session and back towards yesterday's best levels in what has been a choppy session for the complex despite a lack of specific drivers ahead of a busy US agenda and with attention on the G7.
• Currently, WTI and Brent are posting upside of over USD 0.50/bbl in circa. USD 1.00/bbl parameters.
• As the USD comes under pressure, metals are experiencing relatively broad based upside; specifically, spot gold is bid but remains shy of the week's USD 2022/oz best with LME Copper similarly sub-8.3k.
• Saudi's Energy Minister said coordination with OPEC+ countries is a cornerstone of the efforts to enhance the stability of oil markets and maintain their balance, according to the state news agency.

Fixed Income

• Bonds fade from best levels in dead cat fashion awaiting final Central Bank speakers of the week headlined by Fed Chair Powell and ECB President Lagarde.
• Bunds back below par between 134.33-133.76 parameters, Gilts slipping to new intraday lows towards 98.50 vs 99.21 at best and T-note rooted towards base of 113-30/114-05 range.
• Permanent TSB (SAB SM) says it has not seen a slowdown in demand for mortgages due to higher rates, not seeing stress in mortgage book. Note, this headline is potentially a factor behind the recent increase in benchmark pressure, which is seemingly being led by Gilts

FX

• Buck backs off from fresh multi-week peaks awaiting potentially pivotal remarks from Fed Chair Powell, DXY back under 103.500 towards 103.21 trough after forming a virtual 103.620-630 double top.
• Yen claws back losses vs Dollar from 138.72 to 137.98 amidst reports of pre-weekend long liquidation.
• Yuan regains poise from deeper sub-7.0000 lows as Chinese state banks step in to curb the slide.
• Kiwi bounces firmly on 0.6200 handle after NZ trade balances swings from deficit into surplus.
• Aussie, Euro and Sterling all take advantage of Greenback retreat within 0.6617-63, 1.0761-1.0804 and 1.2393-1.2435 respective ranges.
• PBoC set USD/CNY mid-point at 7.0356 vs exp. 7.0392 (prev. 6.9967)

US Event Calendar

• Nothing scheduled

Central Bank Speakers

• 08:45: Fed’s Williams Speaks at Monetary Policy Conference
• 09:00: Fed’s Bowman Takes Part in Discussion at Bankers Convention
• 11:00: Fed Chair Powell, Former Chair Bernanke Speak on Policy Panel

DB's Jim Reid concludes the overnight wrap

Earlier this week Henry and I published a chartbook entitled "A Time Capsule for the Future". It imagines how those in the distant future might look at what the macro signals were telling us now in May 2023. The presentation is here and yesterday we hosted a webinar with around 500 people on, the replay of which will go out this morning to this list. I’ll also add the link to my CoTD later.

Talking of 500 people, tomorrow that number will be at a social event my wife has organised at our kid’s school. We’re having a 3 movie outdoor cinema afternoon/early evening shindig. Fortunately the weather looks clear. Our house currently has more popcorn in it than your local multiplex. Infact as I type this at 5am I can smell it which is a bit off putting. So if you're running short in the weeks ahead you know where to come.

The movie of choice for markets in recent times has of course been the debt ceiling where events seem to be unfolding much quicker than anticipated. It was quite easy last week to suggest that the debt ceiling was having minimal negative impact on markets (outside of short-dated T-bills) but this week's more positive sentiment on the topic has moved bond markets a lot and sent the S&P 500 and Nasdaq to highest levels since late-August, indicating that maybe more risk was priced in than we thought.

The latest driver were comments from Republican Speaker McCarthy, who said “I can see now where a deal can come together”, and that the negotiators were in a “much better place”. Furthermore, he even said he expected the House to consider a deal next week, with an “agreement in principle” possible this weekend. There was some hesitation from Financial Services Chairman McHenry in the afternoon that injected a degree of volatility into markets, but given McCarthy’s tone he seems to think he has enough GOP votes even with some dissenters. Clearly we’ll have to see how this develops and the content of what’s actually agreed, but this is a world away from where we were a week-and-a-half ago, when the two sides came out of their initial meeting with no public progress at all, and the route to a deal was much harder to envisage.

The other big story yesterday was a significant bond selloff that was sparked by hawkish comments from Dallas Fed President Logan (voter). In particular, she said that “we haven’t yet made the progress we need to make” on inflation, and that “we aren’t there yet” in terms of it being appropriate to pause rate hikes. That caused a big reaction in markets, and led investors to dial up their expectations of another rate hike at the next meeting in June. Then later in the session, an FT interview with St Louis Fed President Bullard (non-voter) came out, who said that the situation “may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control”. On the more dovish side, Governor Jefferson (voter) said that “a year is not a long enough period for demand to feel the full effect of higher interest rates”. But the more hawkish comments got the attention, and by the close fed funds futures were pricing the chances of a June hike at 37.6%, having briefly gone as high as 41% on an intraday basis. So for the first time since SVB’s collapse, it’s clear that markets are now considering the prospect of a June hike as a serious possibility rather than just some tail risk.

In many respects, those two stories above are interlinked. After all, if we do get a resolution on the debt ceiling by early June, clearly that would make it easier for the Fed to proceed with a hike at their meeting on June 14. And with greater optimism on the debt ceiling and those hawkish remarks from Fed officials, US Treasuries sold off across the curve. For instance, the 10yr yield (+8.2bps) rose for a 5th consecutive session to a post-SVB high of 3.646%. Meanwhile, at the very front end, the pricing of further rate hikes meant that the 3m yield (+0.7bps) closed at a fresh post-2001 high of 5.225%. 2yr yields rose +9.8bps and are now +44bps above where they were intra-day last Thursday and +59bps above the lows from the prior Thursday, which was just after the last FOMC meeting .

US 1M Treasury yields (x-date sensitive) were down -4.7bps yesterday to 5.299%, that is their lowest closing level since May 5. The 1M yield is now down -23.2ps since its highest closing levels on Monday, having peaked intraday then at 5.577%, which is the all-time high for the security since they were first issued in late-2001. The spread of the 1M treasury yield remains 14bps higher than the 1M OIS overnight swap rate (which controls for the fed funds rate) after peaking at 44.5bps back on Monday as well, which is higher than we saw during the 2011 (5.3bps) or 2013 (23.8bps) debt ceiling episodes.

That risk-on tone from the perceived debt ceiling progress, and the moves to price in a June hike were given further support from various data releases. One was the weekly initial jobless claims from the US, which came in at 242k (vs. 251k expected) in the week ending May 13. On top of that, the Philadelphia Fed’s business outlook for May saw a noticeable rebound to -10.4 (vs. -20.0 expected), after coming in at its lowest of this cycle so far in April. So there was some encouragement for those hoping that a recession might be avoided. That said, there was also further evidence for the pessimists on offer, since the Conference Board’s Leading Index fell a further -0.6% in April, bringing its year-on-year decline to -8.0% now. And for what it’s worth, on the 6 previous occasions since 1960 when it had fallen by such a large amount, the economy was already in recession by that point.

For now at least, markets were focusing on the positives, which enabled equities to advance on both sides of the Atlantic. For instance, the S&P 500 (+0.94%) advanced for a second day, and to a nearly 9-month high, running with a particularly strong close that can be partially attributed to today’s option expiry. Cyclical and tech stocks powered the advance with the NASDAQ (+1.51%) continuing its outperformance, and for the first time this year it now has a YTD performance of +20% (+21.2%), which is one of the biggest of any major index (admittedly after a -33% decline in 2022). And if you just look at the 10 megacap tech stocks in the FANG+ index, the performance is even more notable, with the index up +3.45% yesterday to bring its YTD gains to +53.21%.

Asian equity markets continue to build on the global rally with the Nikkei (+1.04%) leading gains across the region, extending its winning streak to 7 consecutive day and maintaining its’ highest levels since 1990. Meanwhile, the KOSPI (+0.79%), the CSI (+0.21%) and the Shanghai Composite (+0.13%) are also trading up. Elsewhere, the Hang Seng (-1.01%) is bucking the regional trend this morning after weaker results from Alibaba. Outside of Asia, US stock futures are indicating a decent start with those tied to the S&P 500 (+0.18%) and NASDAQ 100 (+0.28%) printing mild gains.

Data from Japan showed that consumer price inflation accelerated to +3.5% y/y in April, matching market expectations against last month’s +3.2% increase. Additionally, core consumer inflation (+3.4% y/y) rose in-line with market expectations in April (v/s +3.2% in March) and stayed well above the central bank’s 2% target, thus renewing thoughts over if and when the Bank of Japan (BOJ) will make adjustments to their YCC policy.

Back in Europe, there was also growing optimism after natural gas prices closed beneath €30/MWh for the first time since June 2021, which has led to growing optimism about the economic picture as we head deeper into the year. That helped support risk assets across the continent, with the STOXX 600 up +0.39%, having also gotten a boost from the positive debt ceiling news as well. For sovereign bonds, the selloff was even bigger than the US though, with yields on 10yr bunds (+11.0bps), OATs (+11.9bps) and BTPs (+13.0bps) all seeing a significant increase.

Here in the UK, gilt yields actually hit some of their highest levels since Liz Truss was PM yesterday, after BoE Deputy Governor Ramsden said that they might accelerate their QT programme. He said that “There’s the potential for us to go up a little bit. I don’t see us going down given the experience of the first year.” However, Governor Bailey also said that “I do not envisage the balance sheet returning to what it was before the financial crisis”. Against that backdrop, yields on 10yr gilts were up +12.0bps to 3.957%, marking their highest level since late-October.

To the day ahead now, and the highlights will include remarks from Fed Chair Powell and ECB President Lagarde. Other central bank speakers include the Fed’s Williams and Bowman, the ECB’s Schnabel and De Cos, along with the BoE’s Haskel. Data releases include German PPI for April. Finally, G7 leaders are currently meeting in Japan.

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